ITAD BIR Ruling No. 314-15

December 7, 2015 ITAD BIR RULING NO. 314-15 Article 10, Philippines-Switzerland tax treaty Salvador Llanillo Bernardo 815 Tower One Exchange Plaza Ayala Triangle, Ayala Avenue Makati City 1226 Attention: Maria Rosario L. Bernardo Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated November 27, 2013, requesting confirmation of your opinion that the dividends paid by WYETH PHILIPPINES, INC. ("Wyeth") to NESTLE S.A. ("Nestle") are subject to the preferential tax rate of 10 percent pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . It is represented that Nestle is a foreign corporation organized and existing under the laws of Switzerland; that it is a resident of Switzerland for tax purposes based on the Certification issued by the tax authority of Switzerland. It is not registered as a partnership or a corporation based on the Certification issued by the Securities and Exchange Commission on May 28, 2013. On the other hand, Wyeth is a domestic corporation, organized and existing under Philippine laws. It is further represented that Nestle is the registered owner of One Million Five Hundred Seventy Four Thousand Four Hundred Fifty Three (1,574,453) Class A shares and Four Million Five Hundred Twenty Nine Thousand Seven Hundred Nineteen (4,529,719) Class B shares, representing 25.7% and 74.2%, respectively of the capital stocks of Wyeth . That during a meeting of the Board of Directors of Wyeth held on November 19, 2013, it declared cash dividends in the amount of Three Billion and Six Hundred Million Pesos (P3,600,000,000.00) in favor of its stockholders of record as of October 31, 2013 based on their respective shareholding to be paid on or before December 31, 2013. EcTCAD It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the sworn Certificate of No Pending Case issued on November 26, 2013. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to Nestle are subject to income tax at the rate 30 percent, thus: "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: SDHTEC "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" In this particular case, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1, 2 and 3, Article 10 thereof provide: " Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term "dividends" as used in this Article means income from shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident. xxx xxx xxx" (underscoring supplied) Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines, at a rate not to exceed: (a) 10 percent if the company recipient of the dividends holds directly at least 10 percent of the capital of the company paying the dividends; (b) and 15 percent in all other cases. HSAcaE This being the case, and considering that Nestle holds 1,574,453 Class A and 4,529,719 Class B shares, representing 25.7% and 74.2% respectively of the total shares of Wyeth , this Office is of the opinion and so holds that such dividends paid by Wyeth to Nestle are subject to income tax at a preferential rate of 10 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Switzerland tax treaty. This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue